What principle is used to propel a four-wheeled truck?

The principle of lever is to place a hard stick connected to the support point, and the hard stick can rotate around the support point. The ancient Greeks classified the lever as a simple machine and studied its working principle rigorously.

Some levers can amplify the input force and give more output force. This function is called "lever" The mechanical advantage of lever is the ratio of output force to input force.

Financial leverage is an important analytical tool for enterprise financial management. Company management can use several levers in financial management to grasp the "degree" of investment and financing decision-making and make corresponding evaluation.

Most scholars describe the application principle of leverage in financial management vaguely. This paper will explain how to understand the leverage principle from a clearer and more intuitive perspective, and how to use the leverage principle to evaluate the company's operation and financial situation.

The essence of financial leverage

The essence of leverage principle in financial management can be summarized as the utilization degree of fixed costs or expenses in each accounting period. The fixed costs or expenses mentioned here fall into two categories:

(1) Fixed costs or expenses arising from business activities (hereinafter referred to as fixed costs), such as depreciation of fixed assets, salaries of employees, office expenses, etc.

(2) The fixed costs or expenses incurred by enterprises in fund-raising activities (hereinafter referred to as fixed financial expenses) are mainly reflected in the interest of debt capital or dividends payable for issuing stocks. In the following analysis, the author assumes that the interest on debt capital is the only fixed financial expense in financing activities.